It’s Still The Prices, Stupid

Why The US Spends So Much On Health Care, And A Tribute To Uwe Reinhardt

A 2003 article titled “It’s the Prices, Stupid,” and coauthored by the three of us and the recently deceased Uwe Reinhardt found that the sizable differences in health spending between the US and other countries were explained mainly by health care prices. As a tribute to him, we used Organization for Economic Cooperation and Development (OECD) Health Statistics to update these analyses and review critiques of the original article. The conclusion that prices are the primary reason why the US spends more on health care than any other country remains valid, despite health policy reforms and health systems restructuring that have occurred in the US and other industrialized countries since the 2003 article’s publication. On key measures of health care resources per capita (hospital beds, physicians, and nurses), the US still provides significantly fewer resources compared to the OECD median country. Since the US is not consuming greater resources than other countries, the most logical factor is the higher prices paid in the US. Because the differential between what the public and private sectors pay for medical services has grown significantly in the past fifteen years, US policy makers should focus on prices in the private sector.

From the introduction

Much has happened in the US and other OECD countries in health policy and health care delivery in the intervening fifteen years. Since 2003 there has been much greater attention given to the cost of treating people with chronic conditions, a greater emphasis on value-based care, more people entering managed care programs, the passage of the Affordable Care Act, the introduction of electronic medical records, consolidation of hospitals and insurers, and many other changes designed to lower the level of spending in the US. As a result, it is important to assess whether the general conclusion that prices are responsible for most of the difference in health spending remains valid and what, if anything, has changed.

Health spending

US per capita health spending was $9,892 in 2016. The US spending level was 25 percent higher than that of Switzerland ($7,919), the country with the next-highest expenditure per capita; 108 percent higher than that of neighboring Canada ($4,753) and 145 percent higher than the OECD median of $4,033. The US spent 17.2 percent of its GDP on health care in 2016, and the OECD median was 8.9 percent.

Public versus private spending

The US financed 50.9 percent of its health care from private sources in 2016, compared to the OECD median of 25.0 percent. It is noteworthy that the differential between the prices paid by public and private insurers in the US has increased drastically since the 2003 article was written. In 2000 the price differential between what public and private insurers paid was approximately 10 percent. The Medicare Payment Advisory Commission recently estimated that private insurers pay prices that are 50 percent higher than what Medicare pays. Increased attention needs to be paid to the prices paid in the private sector.

Spending on pharmaceuticals

In 2015 per capita spending on pharmaceuticals varied from $171 in Poland to $1,011 in the US, with most of the OECD countries spending $400–$600. Recent studies found that prices for brand-name pharmaceuticals were responsible for most of the difference in pharmaceutical spending, with the US providing a considerable portion of the profits to the pharmaceutical industry.

Supply of physicians

In 2015 the US had 19 percent fewer practicing physicians per 1,000 population than the median OECD country (2.6 versus 3.2). The median OECD country had 12.1 medical school graduates in 2015 per 100,000 population, while the US had only 7.5. The US also had the lowest percentage of generalist physicians among the twenty-eight countries with data available, according to the OECD definition: 11.9 percent. The OECD median was 27.9 percent.

Supply of nurses

The US nurse-to-population ratio declined from 2000 to 2015, when it was 7.9 per 1,000 population—20 percent below the OECD median (9.9 per 1,000).

Hospitals

The US had 26 percent fewer inpatient acute care hospital beds per 1,000 population (2.5) than the median OECD country (3.4) in 2015.

Medical technology

The US was second (after Japan) in MRI units per million population and third (after Japan and Australia) in CT scanners per million population in 2015.

Explanations for differences

There is a growing literature on administrative costs. A Commonwealth Fund comparison of health insurance administrative costs showed that the US spent $737 per capita on administration, compared to $94 per capita in the median OECD country. The next-highest-spending country after the US (Switzerland) had administrative costs of only $280. In 2017 Steffie Woolhandler and David Himmelstein estimated that the US would save about $617 billion (about 20 percent of its total health spending) if it moved to a single-payer system. A study comparing administrative costs of physicians in Canada and the US found that US physicians spend considerably more on administrative services than Canadian physicians do.

Health spending versus health care provision

The 2003 article discussed how the buy and sell sides of the marketplace operate. The subsequent literature has validated the arguments made in the 2003 article. First, many OECD countries continue to use their monopsony power to control prices, while the US continues to have geographic areas with providers able to obtain “rents” from having monopolies in their community. Second, the current literature continues to show that the US buy side continues to be highly fragmented by international standards.

A series of recent articles has examined the relationship between the market power of providers in a community and health outcomes and found association with higher prices but very little correlation with health outcomes. These studies show that insurance companies are strengthening their market power through consolidation, while hospitals and physicians’ practices merge into giant conglomerates, strengthening their sell-side market power and driving up the prices.

In the US the evidence suggests that consolidation of insurers does not necessarily lead to lower premiums, copayments, or deductibles, but it shifts profits from providers to insurers, thereby transferring revenues from providers to insurers and not to society.

It’s still the prices, stupid

In 2000 the US had fewer physicians per 1,000 population, physician visits per capita, and acute care beds per capita, as well as fewer hospital admissions per 1,000 population and acute care days per capita, compared to the median OECD country. The US was still not devoting more real resources to health care than most other OECD countries in 2015 or 2016. At that time, the US had 26 percent fewer hospital beds per capita, 20 percent fewer practicing nurses, and 19 percent fewer practicing physicians per capita, compared to the OECD median country. Because the US is still not devoting more real resources to medical care than the typical OECD country, we believe that the conclusion that “it’s the prices, stupid,” remains valid. What is different between 2003 and 2016 is that the differential between what public and private insurers pay for health care services has become wider. Lowering prices in the US will need to start with private insurers and self-insured corporations.

Comment:

By Don McCanne, M.D.

The really important finding of this update of the classic study, “It’s the Prices, Stupid,” is that the conclusion has not changed: Health care spending in the United States is the highest largely because our prices are the highest.

There are a couple of quotes in this update that warrant special attention:

“In the US the evidence suggests that consolidation of insurers does not necessarily lead to lower premiums, copayments, or deductibles, but it shifts profits from providers to insurers, thereby transferring revenues from providers to insurers and not to society.”

Got that? The consolidation of the private insurers has not resulted in benefits to health care consumers nor to society at large. It has shifted profits from providers to insurers. It makes you wonder why the American Medical Association and the American Hospital Association continue to support a financing system heavily dependent on private insurers when those insurers are draining the providers of their profits, which then must be compensated for by yet higher prices.

“What is different between 2003 and 2016 is that the differential between what public and private insurers pay for health care services has become wider. Lowering prices in the US will need to start with private insurers and self-insured corporations.”

Got that one too? The private insurers have been more successful in enabling the increase in health care prices than has the public sector. Success here of course means more profit from higher prices, but not success in controlling excess health care spending to benefit society.

The authors conclude that lowering prices will need to start with private insurers and self-insured corporations, but the past three-quarters of a century has provided more than ample evidence that private insurers and self-insured corporations have been incompetent or derelict in their efforts to control prices; both have been far more concerned with tending to maximizing their own profits.

Single payer advocates understand that reducing prices does not mean cutting physician and hospital payments to unacceptably low levels, but rather it means reducing prices by increasing efficiency of the financing system by eliminating profound administrative excesses, negotiating fair rates, eliminating diversion of funds to passive investors, and use of global budgets similar to financing of other publicly-funded facilities like fire departments.

There are two models that have been proven to be effective: a national health service (socialized medicine) or a single payer social insurance program like an improved Medicare that covers everyone (Single Payer Medicare for All). For the United States, the latter would be less disruptive, not to mention that it already has a following within the nation in a large part because of the popularity of our traditional Medicare program.